Friday, June 18, 2010

BP's Black Swan

Congress is beating up BP on the charge that BP should have built in the available technology that could have eliminated the risk of the catastrophe that has happened. But that's not the way corporations work. I'm sure that they calculate the probable risks of untoward events occurring, and they measure these risks in relation to the expense of eliminating them.

You can't mitigate all risk, so it's a question of how much can reasonably be tolerated. No corporation allocates capex to defend against a meteor hit on its corporate headquarters. In like fashion, I'm sure that BP did not plan to prevent an oil spill on the scale of what occurred, on the rationale that nothing like that has ever happened before. We thought that the financial industry is the only area where Black Swan Events can arise. Not so - any complex enterprise can have them too.

Yes, recrimination doesn't create solutions. The problem, though rare, is still real. We need to come up with a cleanup system that will be cost-effective even for Black Swan events like the GOM today.